Arnie’s California budget
Calpundit provides a useful tabular analysis of how California’s new governor will address the state’s fiscal crisis. Here is the entire budget document. Here is another blog analysis.
Where are the cuts coming from?
Overall, the cuts appear to be approximately as follows: $900 million from MediCal, $800 million from CalWorks welfare-to-work programs, $.6 billion in other health and human services programs, $400 million from higher education, $2 billion from primary education, $400 million from prisons, $1 billion from transportation projects, and $.2 billion in miscellaneous.
On top of that we have fee increases of $1.3 billion, much of that coming from casinos, and $4 billion of borrowing. If we can take all the numbers at face value (hardly ever the case with political budgets), a $14 billion budget shortfall will be covered.
The bottom line: Once you push through the smoke and mirrors, spending cuts amount to only a few billion. Still, this is the best political test we are likely to see of whether real spending cuts can be sold to the general electorate. If it sounds like Arnie is cutting too much budget meat for your taste, keep in mind that California state spending rose 44 percent since 1997-8. State bonds are near junk status and possess the lowest credit rating among the states.
Did life on earth start from Borax minerals?
Read here for the latest scientific discovery.
Bad news for America but no surprise
The United States has dropped in its standing for the 2004 Index of Economic Freedom. We used to be sixth, now we are tenth.
Here are some of the leaders:
1. Hong Kong, for the tenth consecutive year.
2. Singapore
3. New Zealand
4. Luxembourg
5. Ireland
Moving down in the list, France was #44, North Korea comes in last, and Venezuela, Iran, and Libya were among the ten worst. No polling was possible for Angola, Burundi, and Iraq, among other disaster areas.
The United States was downgraded for poor fiscal policy. Note that the Freedom Index is done by the Heritage Foundation and The Wall Street Journal, hardly left-wing critics of Republican economic policy.
Addendum: The Economic Freedom of the World index offers slightly different rankings. For 2003 America remains in third place. The EFW is considered to rely more heavily on quantitative measurement, the Index of Economic Freedom relies more on observer assessments of economic freedom.
The further decline of the mass audience
Total U.S. movie box office just barely held its own for 2003, as reported by the January 5-11 issue of Variety (not on-line). The number of moviegoers declined by three percent. A few major movies, such as “Finding Nemo” and “Return of the King” did very well, but the overall picture was flat. Elizabeth Guider writes: “…unleashing dozens of $150 million films aimed at the global mainstream audience is an increasingly losing proposition.” Audiences for network TV have been poor as well.
Where is everyone going? Are you all reading blogs instead? That I doubt. The big cultural winner for this year is the DVD:
Check the year-end reports from the various sectors of the entertainment industry, and it’s clear that DVD stands alone as an unqualified sensation. It’s such a success that it might even be eclipsing – and cutting into – other leisure pursuits.
Total DVD revenue last year hit $17.5 billion – $12.1 billion in sales, $5.4 billion in rentals – according to new industry totals from market tracking firm Adams Media Research. That surpasses the most optimistic expectations and overshadows spending on movie tickets, music CDs and video games.
Here are some numbers from the side of the consumers:
Hours spent with home video increased 18% from 1997 to 2002. For the average person that means an increase to 58 hours each year, while time spent listening to music, watching network TV and reading books, magazines and newspapers dropped.
This year, movie fans spent an estimated 67 hours watching discs; that is expected to jump another 46% over the next four years to about 98 hours per person per year…nearly a DVD a week…Meanwhile, total TV watching is expected to rise only 3% (with network TV dropping 3%) and moviegoing 8%. Listening to music is expected to fall 19%.
So what does this mean for culture? People are watching the same movies over and over again. Over time we can expect movies to stand up better on multiple viewings, which is the whole point of the DVD format. Movies should become deeper. It is an open question whether the number of movies issued will rise or fall, but I am an optimist. On one hand repeated viewings mean less time to sample extra titles. On the other hand, the compact and popular DVD format gives filmmakers a new way of reaching audience. It will benefit the blockbusters, such as Nemo, but also will help niche films. For instance many people now order otherwise unavailable foreign movies through netflix.com.
Addendum: Do you resent your loyalties to DVDs? Here is a lengthy and excellent post, from Michael of www.2blowhards.com, on how to think about and revitalize your reading. However his remarks will spur your further interest in cinema as well.
The end of the French cultural exception?
The French cultural exception may be coming to an end, but not because of American pressure. The EU, that darling of the French, has decided that film subsidies should not be tied so closely to domestic production. After all, that would be discriminatory. Under the new proposal, a government could demand only that fifty percent of the subsidized film, in revenue terms, is made at home. Currently the figure stands at eighty percent. So they could shoot French films in Greece and still get the subsidies. More generally, the proposed change would force French filmmakers into more co-production agreements with other European nations. Here is the full story from the Financial Times.
Many of the French fear that we would get a bland cinematic “Euro-pudding” as a result. Note, however, that the renowned film Amelie was a French-German co-production, yet it retained a distinctive French flavor. The more likely “problem” is that the domestic political coalition behind French subsidies will be disturbed and may not survive in the long run.
The decision is not yet final, but Brussels can strike down the subsidies without approval from the French government and is expected to do so. Several weeks ago Brussels ruled that the French can no longer ban the advertisement of novels on television. The French feared that blockbuster novels, fueled by aggressive TV campaigns, will drive out more serious literature.
It should be clearer than ever that the French will have to give up their vision of the American bogeyman. France and America have many common interests. The real fear of (many of) the French is modernity and commercial culture, not American culture per se. In fact American culture, and the American presence on the world scene, might in the long run give France an appropriate counterweight to an EU that is growing in power and influence.
The Poincare conjecture
Has the Poincare Conjecture been solved? Possibly. Read this recent news report about a new proof by an obscure Russian loner, Grisha Perelman. The Conjecture is one of the famous Millennium Problems in mathematics.
“This is arguably the most famous unsolved problem in math and has been for some time,” said Bruce Kleiner, a University of Michigan math professor reviewing Perelman’s work.
Here is the clearest statement I can find of what the whole thing means:
To solve it, one would have to prove something that no one seriously doubts: that, just as there is only one way to bend a two-dimensional plane into a shape without holes — the sphere — there is likewise only one way to bend three-dimensional space into a shape that has no holes. Though abstract, the conjecture has powerful practical implications: Solve it and you may be able to describe the shape of the universe.
Or try this:
[the] work has huge implications for our understanding of partial differential equations. PDEs (as they are known in the trade) are the mainstay of physics and engineering. Mazur notes that physicists and engineers use PDEs to model everything from the flow of water to the buildup of heat in aircraft engines. “I would expect this work to have enormous applications in many fields of science,” he says.
There may also be applications for scientists studying DNA…Some kinds of DNA wrap themselves into knot formations that can be insanely difficult to decipher. But Mazur says Thurston’s classification [referring to related work] may provide a way to calculate the exact nature of any knot – so in theory it could be used to work out the structure of knotty DNA molecules.
The upper reaches of mathematics can often seem absurdly detached from life down here on planet earth, but Mazur points out that you can never know where things might lead. He cites the case of James Clerk Maxwell. In the late 19th century Maxwell worked out the equations of electromagnetism. “At the time it would have been easy to write off Maxwell’s ideas about invisible forces as a mystical abstraction,” Mazur says. But Maxwell’s work laid the foundations for the development of radio, and hence the communications revolution. Every time we turn on the TV or pick up a cellphone or log onto a WiFi system we are reaping the rewards of Maxwell’s equations.
Another bottom line: Perelman will receive a million dollars if his result stands up. Alex says this is another win for bounty hunters!
Does the case for free trade require factor immobility?
Paul Craig Roberts has been claiming that the traditional case for free trade requires immobile factors of production. Michael Kinsley offers his [critical] understanding of the argument as well. I take the bottom line to be as follows. If labor can migrate, trade will not always benefit both countries, in all conceivable circumstances. Those laborers will move to the country with the strongest absolute advantage. This may lead to a brain drain at home, and perhaps crowding and lower wages in the recipient country. In other words, there are potential externalities from the migration of labor.
Another scenario is that American capital flows, say, to China, instead of Chinese labor coming to America. America will not experience overcrowding, nor will China have a brain drain. Still the real wages of some American workers might fall. Chinese labor will be concentrated in some sectors more than others. Certainly some American workers will be worse off, though economists will continue to insist that wealth as a whole will go up.
None of these arguments are new and they do not represent a novel critique of free trade. The first version of the argument suggests, at best, that we cannot currently move to complete free immigration. It does not dent the case for free trade. The second argument simply points out that wealth-improving policies do not benefit everyone.
The ever-insightful Daniel Drezner offers some further commentary on the new anti-free trade arguments. He also notes that the “factor mobility” scenario does not involve fundamentally new considerations from the “factor immobility” scenario.
The bottom line: We should take care to minimize the negative externalities from foreign trade and investment, and this is best done by well-functioning labor markets and sound macroeconomic policy. Basically Roberts is peddling snake oil. His argument boils down to old-style protectionism, dressed up in new rhetorical garb, not new substance.
By the way, as an economist, I sometimes receive irate emails telling me I have never had to compete with subsidized foreign workers. It is then suggested that if I faced such competition, I would not favor free trade. This description of the facts is not true. Most of my Ph.d. class at Harvard came from other countries, and many of them were heavily subsidized by their governments. I was not subsidized by the American government and yet I had to compete with these people for jobs.
Addendum: See further remarks by Joseph Salerno. See also Truck&Barter., which offers further links of value.
French revenge on Hollywood?
Henri Crohas’s company, Archos SA, makes a small hand-held device, like a bulky Palm Pilot, that can record and then play back scores of movies, TV shows and digital photos on its color screen or a TV set. The gadget — which in effect does to movies what Apple Computer Inc.’s iPod does to music — already has sold 100,000 units world-wide during the past six months, beating the big consumer electronics makers to the U.S. market.
Archos’s device, which costs about $500 to $900 depending on the model, ignores an anticopying code found on a majority of prerecorded DVDs. That means consumers can plug the Archos device into a DVD player and transfer a movie to it. Users also can transfer recorded TV programs and digital music files to the Archos device.
Yes this item is from a small company in France, here is the full story. Stay tuned for further developments. The bottom line is that the Internet is not the only means of pirating music and movies.
You are a better bargainer than you think
Negotiators tend to think they are more transparent than they truly are. They believe that their negotiating partners can discern their thoughts, and negotiating positions, when in fact the partners are clueless. See the experimental evidence from this recent paper by Leaf van Boven, Thomas Gilovich, and Victoria Medvec. There is good evidence that we send involuntary signals of our own trustworthiness. Still, we do not always have a good sense of how those signals are interpreted by others.
The basic result may stem from a kind of excess sympathy. The negotiator tries to put herself in the position of the “other mind,” but cannot eradicate the knowledge of her own bargaining position. So the model of the other mind contains more self-knowledge than is rationally justifiable. Related results have been found in other areas. Individuals overestimate how much others pick up on the cues from their facial expressions. Similarly, individuals who are laughing think they appear more expressive than they do to others. As for bloggers, well, they probably think that readers pick up more of the nuances of their writing than is the case.
The Endangered Species Act
Lynne Kiesling offers a thorough discussion of how the act does little to protect endangered animals. I had started my own post on this topic, but stopped writing once I came across Lynne’s, which is replete with excellent links. Juan Non-Volokh offers an equally biting critique of the Act.
The return of Horatio Alger
Paul Krugman published a December article in The Nation called “The Death of Horatio Alger.” He argued “America actually is more of a caste society than we like to think. And the caste lines have lately become a lot more rigid.”
Recent research by Kerwin Kofi Charles and Erik Hurst looks at intergenerational mobility in more detail. Here is a brief summary of the article, and here is a pdf of an earlier version of the paper.
The published version, “The Correlation of Wealth Across Generations,” in the December 2003 Journal of Political Economy, tells us the following:
1. “Age-adjusted parental wealth, by itself, explains less than 10 percent of the variation in age-adjusted child wealth.”
2. 20 percent of parents in the lowest quintile of the parent’s wealth distribution have children who end up in the top two quintiles of their generation. One-quarter of the parents in the highest wealth quintile end up with kids in the two lowest quintiles.
3. The age-adjusted intergenerational wealth elasticity is 0.37. What does this mean? If parents have wealth 50 percent over the mean in their generation, the wealth of their children will be 18 percent above the mean in the childrens’ generation.
4. Income levels account for about one-half of the parent-child wealth relationship. In other words, high income parents tend to produce high income children, to some extent. The children earn much of their wealth. Education and financial gifts account for very little of the correlation across parents and children.
5. Parents and children allocate their financial portfolios similarly, whether for reasons of genes or learned behavior. These common patterns of investment and savings are the second biggest factor behind the intergenerational wealth correlations we observe.
Note that the figures above do not include income from bequests. In this regard they underestimate some of the intergenerational correlation. On the other hand, large numbers of individuals do not receive bequests until they are at least in the 50s, so the figures measure the opportunities open to them in the earlier stages of their lives. And note that the data are recent, the wealth of the children is measured in 1999.
So what is the bottom line? Yes, there is some correlation in wealth across the generations. But most of that correlation (almost seventy percent) comes from continued hard work and savings. The authors do not examine Krugman’s claim that mobility once was greater, but it seems premature to suggest that the American dream is gone.
Addendum: Cardinalcollective.com offers some useful discussion and links, here is Daniel Drezner’s treatment, again replete with links.
Why do Japan and China keep on buying dollars?
The dollar has fallen about twenty percent against the Euro in the last year but China and Japan continue to accumulate large dollar surpluses. At the same time, many economists worry that they will dump their holdings, sending the dollar into a free fall.
Michael Dooley, Peter Garber, and David Folkerts-Landau suggest that this financial policy is no accident. They view the Chinese and Japanese as pursuing deliberate full employment policies. They buy and hold dollars, not as an investment, but rather to subsidize their own exports. Read this summary of the argument, or buy an NBER working paper here. Garber puts the point bluntly:
“The fundamental global imbalance is not in the exchange rate,” Garber told the IMF forum in November. “The fundamental global imbalance is in the enormous excess supply of labor in Asia now waiting to enter the modern global economy.”
Garber estimates that there are 200 million underemployed Chinese who must be integrated into the global economy over the next 20 years. “This is an entire continent worth of people, a new labor force equivalent to the labor force of the EU or North America,” he explains. “The speed of employment of this group is what will in the end determine the real exchange rate.”
Garber likens the global labor imbalance to the collision of two previously independent planets — one capitalist and one socialist. “Suddenly they were pushed together to form one large market,” he says. The best way to restore equilibrium is for the former socialist economies to pursue export-led growth — and for the United States to act as a buffer and absorb the world’s exports.
Brad DeLong says he doesn’t believe the argument because the U.S. trade deficit is too large relative to the American economy. Brad predicts a revaluation of the Asian currencies within three years. Garber predicts that the new arrangement can last until another 200 million migrating Chinese find jobs. Either scenario would be better for the U.S. economy than some of the scare stories suggest. A weaker dollar in Asia would help correct the U.S. trade imbalance and it is unlikely that the Chinese would allow the yuan to rise so rapidly that the dollar would plummet. And if the current arrangement can continue, so much the better. The bottom line is this: the world economy, in real terms, is drawing on a massive “free lunch,” namely migrating Chinese labor.
Reparations for Haiti?
Many Haitian politicians, including Aristide, are demanding $21 billion in reparations from the French government. They seek the return of the 1825 “blood money” they paid to Paris for their 1804 independence, with compound interest of course.
Today the Haitian government pulls in a mere $237 million a year. I have seen per capita income estimates ranging from $250 to $400 a year, depending on which numbers you trust. So $21 billion would make a big splash in at least a few bank accounts. One of the European papers I picked up on honeymoon cited a Haitian politician as claiming, without irony or apology. that “claims to restitution” were now his country’s chief national asset. That same politician objected to the rest of the world viewing Haiti as “barbarians.”
And the not so surprising response?
The French government has balked at the demand, citing “bad governance” and the 200 million Euros (about $250 million) of aid already dedicated to Haiti since 2000.
Samuel Bowles, in his recent book, suggests that Haiti may have been the richest place in the world at the end of the eighteenth century. While this estimate may be exaggerated, there is little doubt that the place once was prosperous. Even after the French tribute and blockade, Haiti was considered to be richer than its island neighbor the Dominican Republic. But today the DR has a per capita income over $2,000, many times that of Haiti. More generally, calls for long-term restitution face a problem of benchmarking damages. If the oppression in question had not happened, what is the relevant comparison? A Haiti where the French confer all relevant benefits and then act like gentlemen? Or a Haiti where the French never show up at all? And if the Haitian economy has been shrinking, should we not compound the 1825 loss at a negative rate of interest rather than a positive rate? It is difficult to believe that those funds would have been saved and invested at positive rates of return, reaching into the present day.
Is it better to be a small nation?
Of the ten richest countries in the world in terms of GDP per head, only two have more than 5m people: the United States…and Switzerland, with 7m. A further two have populations over 1m: Norway, with 4m and Singapore, with 3m. The remaining half-dozen have fewer than 1m people.
The Size of Nations, a new book by Alberto Alesina and Enrico Spolaore, addresses why some small countries have done so well. Here is a related working paper by Alesina, here are some related working papers by Spolaore. As some of the larger empires of the past break up, questions of national size increase in importance. More than half the world’s countries have fewer than six million people, roughly the population of the state of Massachusetts.
The Economist offers the following summary:
The book argues that the best size for countries is the result of a trade-off between the benefits of scale and the costs of heterogeneity; and that openness to trade alters this trade-off. The gains from being big are considerable. Large countries can afford proportionately smaller government (although they often don’t). Essential running costs can be spread over many taxpayers. Embassies, armies and road networks are all likely to cost less per head in populous countries. Defence in particular is cheaper for giants. “It is only safe to be small in a peaceful world,” say the authors (who, unusually for economists, offer two stimulating chapters on conflict, war and the size of nations).
Large countries are able not only to spend more efficiently; they can also raise taxes in more cost-effective ways. Income taxes are more efficient than customs duties, but require a bigger initial bureaucracy. Large countries have bigger internal markets, allowing more specialisation and returns to scale. And they can redistribute resources geographically, providing insurance when one part of the country is hit by disaster or recession and shifting income from rich regions to poor ones.
So why don’t all countries merge into one large superstate? Well, smallness has its benefits too:
…large countries are also likely to have a diverse population whose varying preferences and demands a government may find hard to meet: America, Brazil and India are cases in point. A study of local government in the United States suggests that Americans are willing to put up with the higher running costs of small municipalities and school districts in exchange for living in communities with little variation in income, race or ethnicity. This could imply that people also prefer to live in more homogeneous countries. With the main exception of America, successful big countries (such as Japan) have relatively homogeneous populations.
The authors argue that a worldwide regime of free trade will make the optimal size of nations smaller. If you can trade with other nations, there is no need to be large to ensure an open internal marketplace. So rising globalization should make secession easier to endure, which indeed seems to be the case.
My take: I am less convinced of the benefits of smallness. Think of small countries as having greater scope for experimentation, and thus a higher variance of outcomes. They also pop in and out of existence at a higher rate. Brazil will always be Brazil, but the fortunes of Croatia have varied over the years. If we look at the small countries that continue to exist, there is positive selection bias. We should expect them to do better than average, as the failures disappear, unlike with the less politically fluid larger countries. The observed superior performance of small countries does not mean that ex ante you should prefer to live in San Marino. In a small country, you face some very real chance that your system will fail, and that you will cease to exist, possibly under unfavorable terms. Especially if you are risk-averse, there is much to be said for the security of living in a larger nation.
Oxford Encyclopedia of Economic History
Oxford University Press has just published a five-volume Encyclopedia of Economic History, edited by Joel Mokyr of Northwestern University.
Virginia Postrel offers a good review and some interesting details:
Did you know that the oldest records of chemical pest control date back 4,500 years, to Sumerian farmers who used sulfur compounds to kill insects and mites?
Or that a century ago, railroad companies accounted for half the securities listed on the New York Stock Exchange? (Before the railroads, with their huge demand for capital, securities markets traded almost entirely in government debt.)
Or that in 1850, shoemaking employed more workers in the United States than any other manufacturing business?
The past doesn’t look quite like we tend to picture it: many of the people who got rich from the Industrial Revolution were not industrialists, but landowners who held urban real estate or property with access to water power or mines. From 1880 to 1914, unions went on strike at least 50 times to stop American employers from hiring black workers. Above all, Professor Mokyr says, “in the Middle Ages and in classical antiquity, the destitute were the vast majority of the population.”
And what is the bottom line to economic history?
Professor Mokyr says: “There are certain unifying themes that you see everywhere. People have to make a living. People would rather have more than to have less. On the whole, they don’t behave stupidly. They do as well as they can under the circumstances. The variation is in the circumstances, in the richness and diversity of human economic institutions that have emerged over time.”
That is not all:
“Economic history,” Professor Mokyr writes in the preface, “covers nothing less than the entire material existence of the human past.” The encyclopedia gives theoretical economists a way to check their ideas against the realities of the past. “You guys can’t write these big, fancy models without looking at the details,” Professor Mokyr says.
I have not yet seen the volumes but most likely the set will not be surpassed anytime soon.